The Business Impact of Compensation Management
Imagine continuing to manage your personal investment portfolio with equal contributions spread across each account, regardless of its past performance or future potential. If a low-involvement, low rate of return approach fits your investment style, you might just be happy with the resulting meager financial gains.
Most of us expect our money to perform better on our behalf. We diversify our portfolio, search for investments that are trending positively, then monitor our distributions and make course corrections that, over time, reinforce our investment strategy. Those same best practices in money management can also be applied to an organization’s strategy for compensation management.
Compensation in terms of salaries and wages is often the single biggest cost to an employer and, depending on the industry, can be up to 70 percent of a company’s annual operating costs.[1] Yet many companies put this critical investment on autopilot by implementing across-the-board pay increases without taking individual performance into consideration.
With so many organizations focused on controlling costs, getting the most out of compensation budgets means developing a strategy for wise investments in talent. Effective compensation management starts by identifying a pay philosophy and strategy, then evaluating the plan on a regular basis to remain in balance with external market rates.
Once a compensation plan is in place, salary increase budgets can then be allocated to reward individuals for their performance against goals that drive the business, creating a true “pay for performance” culture. But it’s not just high-performing employees who benefit from effective compensation management; the company feels the positive impact from:
· Higher productivity. When high-performing employees understand the connection between their individual contributions and their pay potential, motivation is created to deliver above-average results.
· Budget effectiveness. By differentiating salary increases based on individual performance, companies can ensure that their merit budgets generate the greatest ROI.
· Improved retention. When your strongest players realize that their performance is not only noticed but also fairly rewarded, they’re more likely to be satisfied and will continue to contribute for longer periods of time.
Perhaps some people are comfortable taking a “low involvement, low rate of return” approach to their personal investments. While that may be fine on a personal level, that strategy doesn’t hold up well for business. Invest the time to develop your compensation strategy, then invest in an automated compensation management software solution to ensure that your compensation program delivers a solid, long-term performance.
[1] Harris, Stacey and Jones, Katherine. Getting Compensation Right: The Value of Compensation Analysis and Planning Tools. Bersin & Associates. April 2011.